Climate not conducive to job creation

The Federal Government Has Not Created an Environment Conducive to Job Creation: High Payroll Taxes Are a Major Impediment to Job Growth, Say Top Canadian Pension Fund Managers

Contact:

Michael Walker, Executive Director
The Fraser Institute, (604) 714-4545 Email: michaelw@fraserinstitute.ca

Release Date: 04 June 1996

VANCOUVER, BC>>> Canadian money managers responsible for approximately $150 billion in total assets under management hold the view that the federal government has not created a climate conducive to job creation, a Fraser Institute survey has found.

The Spring edition of The Fraser Institute Investment Manager Survey found that an overwhelming 74 percent of Canadian pension fund managers surveyed believe that the federal government has not created an economic environment conducive to job creation. Sixty­seven percent of fund managers surveyed also believe that high payroll taxes are the single biggest obstacle to job growth in Canada. "This view amongst fund managers suggests that the federal and provincial governments must reduce the payroll tax burden on businesses in order to foster a climate for job growth," said Fazil Mihlar, Policy Analyst at The Fraser Institute.

Canadian taxes are nearly 7 percent more as a percentage of GDP than those of its top 5 trading partners. In addition, payroll taxes have risen substantially. Taxing labour income (payroll and income taxes) for instance, drives a tax wedge between the employer's cost of hiring a worker and the after­tax income the worker receives. This tax wedge reduces the incentive to work and discourages firms from hiring new workers by raising the cost of labour. Firms will, and have, substituted capital for labour. Economic studies indicate that high tax rates retard economic growth and consequently job creation. "The blame for sluggish job growth, therefore, should be laid squarely on the shoulders of the federal and provincial governments, and not on the private sector, which has created nearly 800,000 jobs over the last four years," added Mr. Mihlar.

Solutions to the CPP crisis: mandatory private RRSP or a fully­funded plan

No fewer than 98 percent of respondents think that it is very likely or likely that the CPP/QPP will face a major funding crisis over the next 25 years. Moreover, the most preferred solution to the crisis among those surveyed was either replacing or expanding the current CPP with a mandatory private RRSP. The "second best" solution as viewed by the pension fund managers was to move to a fully­funded plan with the funds held in a professionally­managed diversified fund. The least preferred solution was to maintain the current CPP with reduced benefits. "Given the $556 billion in unfunded liabilities, the results of the survey sends a clear message to the federal government that the pay­as­you­go scheme has to be abandoned and replaced with a mandatory RRSP scheme or a fully­funded plan," noted Mr. Mihlar.

Strong support for national securities commission

In spite of all the criticisms which have been levelled at the formation of a national securities commission, 94 percent of the fund managers surveyed were in favour of the establishment of a national securities commission to replace the different provincial securities commissions.

Most popular derivative instrument: Canadian stock index futures/options

The survey asked respondents to list the type of derivative products they currently use. Eighty­three percent of respondents reported using at least one type of derivative product. Mr. Mihlar reported that "among those surveyed, the most widely used derivative is the Canadian stock index futures/options."

Fifty­two percent of respondents indicated they use Canadian stock index futures/options. This was followed by international stock index futures/options, which are used by 44 percent. Thirty­seven percent of fund managers indicated that they use Canadian share options. Canadian government exchange­traded futures/options and exchange­traded currency futures/options tied for fourth place with 33 percent each. Forward rate agreements ranked fifth at 27 percent. "Exchange­traded derivative products as opposed to over­the­counter (OTC) instruments appear to be the preferred instrument for fund managers," added Mr. Mihlar.

Relative growth in the use of derivatives

Respondents were asked whether there has been a growth in the use of derivatives over the last two years. While 40 percent of the participants said the use of derivatives has grown, 51 percent said their use of derivatives remained the same.

OTC derivatives appear to be gaining in popularity. Forty percent of the respondents stated that OTC derivatives were either very important or important portfolio management tools. This is up from 24 percent from last year. Fifty­eight percent said that OTC derivatives were not very important or unimportant. However, this is a drop from 76 percent in last year's survey.

Motivating factors for the use of derivatives: foreign property, cost efficiency, asset allocation tool, liquidity and hedging tool

Foreign property exposure and cost efficiency were cited as the biggest motivating factors for trading in derivatives. These two factors scored 6.2 and 6.1 respectively out of a possible 10 and were rated as the highest contributing factors. These were followed by asset allocation tool (5.9) and liquidity (5.6). Derivatives are also used as a hedging tool (5.0). "It appears that the federal government's 20 percent ceiling on foreign holdings in pension plans is one of the contributing factors driving the use of derivatives in Canada," explained Mr. Mihlar.

Major areas of concern: deficit reduction and tax reform

While deficit reduction remains the most important issue facing the federal government according to the pension fund managers (75%), high taxes (17%) are also an area of increasing concern. Mr. Mihlar noted: "The federal government, therefore, will have to deal with not only deficit reduction in the next budget, but also with tax reductions."

Separation of Quebec a likely prospect

When asked whether the province of Quebec will separate within the next five years, 66 percent of the respondents said it was either very likely, likely or somewhat likely. "These numbers suggest that Ottawa should deal with the unity file as a matter of utmost priority," commented Mr. Mihlar.

Bank of Canada receives a unanimous thumbs­up for its conduct of monetary policy

The Bank of Canada maintained its high approval rating once again. All of the respondents said the Bank of Canada was doing a good job in its conduct of monetary policy.

High approval rating for the Minister of Finance

In budgetary matters, fund managers appear to have confidence in the Finance Minister. In fact, 90 percent of the respondents rated his performance as either very good or good.

Established in 1974, The Fraser Institute is an independent public policy organization based in Vancouver.

For further information contact:

Suzanne Walters, Director of Communications,
The Fraser Institute, (604) 714-4582,
Email suzannew@fraserinstitute.ca

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